Amortisation

Plain-English definition. Amortisation is the process of paying off a loan through regular instalments that cover both the interest charged and a portion of the original amount borrowed (the principal), so that by the end of the loan term the balance reaches zero.

How it works in Australia. Almost all standard Australian home loans are amortising principal-and-interest (P&I) loans, typically over 25 or 30 years. Lenders apply interest daily on the outstanding balance and debit it monthly. Early in the schedule, most of each repayment goes to interest because the balance is high; over time, the principal portion grows and interest shrinks. ASIC's Moneysmart mortgage calculator uses this exact method.

Concrete example. A $600,000 loan at 6.20% p.a. over 30 years has monthly repayments of about $3,676. In month one, roughly $3,100 is interest and only $576 reduces the principal. By year 20, the split flips — about $1,950 goes to principal and $1,726 to interest. Total interest over 30 years: ~$723,000, more than the original loan.

Common confusion. People assume halfway through the term they've paid off half the loan. Not true: with a 30-year loan at 6%, after 15 years the borrower has paid down only about 30% of the principal. This is why extra repayments early in the loan have a disproportionate impact.